European loan portfolio market to brush off China-led volatility to close €152bn in 2015

China’s steady stock market collapse since June – culminating in a 8.5% one-day fall on the Shanghai Composite Index on Monday – has reverberated around financial markets globally, leading some to suspect a potential delay in the US Federal Reserve’s long-anticipated rise in interest rates.

The net effect of this volatility in real estate markets could be to reduce banks’ willingness to lend and an increase in the cost of debt, including market flex clauses on new loans.  In turn this could impact direct and loan portfolio financings, particularly for larger deals.

However, Deloitte’s Deleveraging Europe market update for the first half of the year, published today, still predicts loan portfolio sales expected to reach €152bn in 2015. This compares to 2014’s €93bn.

David Edmonds global head of portfolio lead advisory services at Deloitte, said: “Notwithstanding the recent wobble in the equity markets, appetite remains unabated for European debt pools. We expect sales will only continue to increase with such a significant amount raised by distressed debt and private equity funds looking for a home across Europe.”

Deloitte’s €152bn estimate of loan sales is comprised of €48bn (£35bn) in the UK; €27bn in Ireland; €14bn in Spain; €20.5bn in Italy; €8.4bn in Austria and CEE; and €8bn in German (excluding Deloitte reports counted €21bn in shipping loans).  

By asset type, just over €50bn, or approximately one-third, is CRE, down from around €62bn last year.  So far in H1, less than €20bn has closed leaving the majority of the year’s CRE loan sales still ongoing or in preparation stage.

The major swing over the year has been in the increase in residential loan sales, this year expected to reach just under €50bn, compared to 2014’s circa €12bn.

Project Slate, the £2.7bn residential mortgage book sold at a premium to CarVal/JPMorgan in October 2014 followed by Cerberus’ acquisition of a portion of the CHL book and the CHL platform, “sets the scene for more major residential mortgage loan portfolio sales in the UK,” reported Deloitte.

Regulatory changes continue to make residential increasingly capital intensive for banks, which is driving their divestment at a time when private equity firms are looking to build residential platforms.

Edmonds added: “2014’s figure was already a three-fold increase on 2013’s, and we expect to end this year even higher. Selling these types of assets becomes a good option to improve capital positions, with banks under increased pressure from regulators and shareholders to clean up their balance sheets. We expect to see the market drift away from Britain and build further in Spain, Italy and Central and Eastern European Countries (CEE).

“In the past, these sales have been driven by commercial real estate loans, but now we are seeing more residential mortgages being sold off in improving markets and the emergence of SME corporate debt packages.

“This year sales by UKAR and GE are boosting numbers in the UK, underpinning the residential mortgage focus of that market. Distressed debt investors and challenger banks are willing to step up and buy these loans, be they non-core or non-performing loans, on the basis they will start performing in future as the economy improves.”

Major CRE and residential live loan portfolio sales include:

NAMA’s €7.2bn Project Arrow NPL which has narrowed to three;
The potential sale of the €4.2bn Propertize platform;
Aviva’s sale of the £2.7bn (€3.7bn) Project Churchill UK NPL;
Battle for €2.4bn Project Jewel narrows to five;
Bankia’s €4.8bn residential and commercial property Project Big Bang;
Banca Comerciala Romana’s €3.6bn Project Neptune;
Kildare Partners acquisition of GE Capital Real Estate’s €740m German NPL
UK Asset Resolution (UKAR), which manages the government’s ownership of Northern Rock and Bradford & Bingley, is in the process of selling the £13bn Granite portfolio which is made up of some of Northern Rock’s riskiest residential loans.
GE is also selling its circa £7.7bn residential mortgage platform.

Source: Costar Finance